German life insurers more exposed due to asset-liability mismatch: Fitch
German life insurers are more exposed that their peers in other countries to the risk of low interest rates for an extended period due to asset-liability mismatches and the widespread use of investment guarantees to customers, according to Fitch Ratings.
Firms are adapting by changing their business mix and re-pricing, but Fitch suggests a further fall in yields they receive when reinvesting maturing assets put profitability and capitalisation under pressure, which in turn would affect ratings.
According to Fitch, the market for German life insurers has relatively high contract durations, which rose significantly in the last ten years due to the introduction of government-subsidised annuity products and a change in the tax law in 2005.
Due to the limited availability of high-quality, liquid, long-duration bonds in the German market, asset durations had not increased at the same rate as liabilities, said Fitch.
Fitch estimates that the average asset-liability duration gap for German life firms is one of the highest in Europe at around six years, which exposes the sector to reinvestment risk as assets mature and have to be reinvested at lower rates.
Fitch also calculated that between 80 to 85 percent of mathematical reserved relate to products with guaranteed returns, which dominate German life insurers’ balance sheets, and that firms would need an investment yield of 2.5 percent on average to meet their guarantees.
“Insurers have reacted by reducing the dependence on guarantees and the duration of the contracts, and by increasing the duration of assets,” said Fitch.
“But in many cases the response has been slow and for most companies these measures will not be sufficient to reduce the risks associated with long liability durations and high guarantee levels to comply with Solvency II without applying transitional measures.
“We therefore believe many German life companies will have applied to the regulator for approval to use transitional measures to limit the initial impact of Solvency II.”
Fitch added: “We expect rated German life companies to meet policyholder guarantees despite these risks. Simulated run-off scenarios support our view that even if interest rates remain low, firms will be able to pay the guarantees for a prolonged period. But profitability, and therefore ratings, could come under severe pressure if these scenarios occur.”
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